Major Eurozone Banks Fail ECB Stress Test

Nearly one in five of the eurozone’s biggest banks failed to meet the European Central Bank (ECB)’s comprehensive test of their financial safety. The ECB and European Banking Authority (EBA) released the results of its stress tests on 26 October.

Twenty-five of the region’s 130 lenders assessed by the ECB were judged to have failed the stress tests – the biggest-ever single review of the single currency’s major banks.

Thirteen of the 25 need to raise €25bn of fresh capital, while the other 12 have already covered their shortfalls, the ECB said of the tests, which covered the banks’ positions at the end of last year.

The two bodies’ assessments, which model scenarios such as downturns in the housing market, a further recession and a spike in borrowing costs, cover similar ground but have major differences. The ECB conducted an additional review of eurozone banks’ assets ahead of it taking over as the primary regulator of banks using the single currency; the EBA’s tests also cover European banks that are not part of the euro, including the UK’s.

The tests are designed to restore confidence in the banking sector by giving banks that pass a seal of approval rather than acting as a black mark against those that fail. The EBA previously held two rounds of stress tests, most recently in 2011, but they regarded as not stringent enough.

“This unprecedented, in-depth review of the largest banks’ positions will boost public confidence in the banking sector,” said ECB vice president Vitor Constancio. “This should facilitate more lending in Europe, which will help economic growth.

The current round is the first to be conducted by the ECB. To pass, banks must have had a Tier 1 Capital ratio – a measure of their safety – of 8% last year. Under the adverse scenarios the ECB is simulating, this can fall to no more than 5.5%.

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